Analysts at Goldman Sachs see London Market insurers as well placed to benefit from the current tailwind to insurance pricing, after delivering attractive returns over the insurance cycle.
Following an acceleration of reinsurance pricing in 2020, analysts now believe pricing is moderating at attractive levels, which should lead to above cycle ROEs over the next three years.
The economic recovery should also aid top line growth over and above pricing tailwinds for firms in the London Market, Goldman Sachs says.
Primary and specialty insurance pricing are increasing faster than reinsurance pricing, which should play to the strengths of insurers like Beazley and Hiscox, the firm added.
Goldman Sachs analysis shows that Lloyd’s names have materially outperformed their large cap European reinsurance peer group on the basis of both IFRS earnings and return on equity.
The London Market names have all reported double digit ROEs over the past 10 years, which includes the impact of COVID in 2020, the high level of catastrophe losses in the past three years and the soft insurance market which dominated this period.
Beazley has delivered the highest average ROE of 12.3%, with Hiscox and Lancashire reporting average ROEs of c.9% and c.10%, respectively.
Hiscox’s 10-year ROE would have been c.240bps higher at c.11.5% without its 2020 losses, but even with the 2020 losses it has outperformed three of the large four reinsurers.
“We believe this is a strong performance, and shows the consistent value these companies can generate even in soft market conditions with a period of above average catastrophe losses,” Goldman Sachs stated.
Going forward, analysts expect that the combination of higher inflation (including social inflation), high level of weather losses and low interest rates will continue to keep pressure on insurance pricing, while strong global GDP growth will increase the underlying demand for insurance as well, over and above price increases.